FY results: Robust growth and strong margins
JPJ’s maiden UK results reflected the robust nature of its underlying business model. Group FY16 revenues grew 15% on a pro forma basis to £269m vs our estimate of £265m. The company’s EBITDA margin of 38% was 80bp ahead of our forecast.
JPJ is organised into three divisions, of which the Jackpotjoy division is the largest, comprising 70% of revenues and 83% of EBITDA. 77% of the business is derived from regulated markets, of which the UK comprises 66%.
Customer retention rates were 90%. Average active customers grew 15% to 235.6k in Q416, with average monthly gaming revenue per active customer rising 4% to £86.
Within the context of the gaming industry, JPJ is an outlier in terms of its capital structure and lack of dividend. Adjusted net debt of £408m equates to 4x leverage and further cash outflows are due in June 2017. However, underlying operating cash flow conversion of 101% is indicative of the company’s ability to steadily restructure its balance sheet.
Jackpotjoy: Industry-leading margins
JPJ’s flagship brand is Jackpotjoy, which has a c 23% share of the UK online bingo-led market. The division includes Starspins and Botemania real money gaming (RMG) brands. Jackpotjoy and Starspins also offer social games. The UK is the biggest market, accounting for 80% of revenues.
Revenues for the Jackpotjoy division increased from £121m to £188.2m in 2016, and compares to our estimate of £183m. Jackpotjoy UK real money comprised £89.6m, with social gaming contributing c £19m.
We estimate that Starspins revenue grew from £11m in 2015 to £32m in 2016, largely due to the successful mobile launch in Q315. Botemania’s slot launch in Q216 contributed to a revenue increase of approximately £21m to £28m in 2016.
Divisional EBITDA margin grew from 39% to 45% and is significantly higher than industry norms, largely due to lower marketing spend (strong brands), as well as a favourable revenue share arrangement with Gamesys (10% rising to 12.5% in 2020).
Mandalay: Flat revenues and lower margins
Mandalay’s revenues of £21.7m were flat YoY and slightly lower than our forecast of £22.4m. EBITDA margin fell from 39.5% to 30.6% on the back of increased marketing spend, royalties paid to 888 (Dragonfish platform) and the introduction of POC tax. With the end of the earn-out period for Jackpotjoy, the group anticipates additional cross-selling opportunities for the Mandalay division.
Vera&John: Continued organic growth
Vera&John was launched in 2011 and is a global online casino operator, with its own proprietary platform. Vera&John operates largely in Scandinavian and unregulated markets.
Divisional revenues grew from £51.9m to £59.1m, due to continued organic growth in existing markets, helped by the introduction of flexible deposit limits and steady growth in revenue per customer.
EBITDA margin declined from 31% to 30%, largely due to the InterCasino brand migration. Although the casino business is a fast growing segment, we expect continued margin pressure as markets regulate.
Gamesys: Amended contract terms
JPJ’s relationship with Gamesys has been complex and expensive, with Gamesys assuming responsibility for all aspects of the Jackpotjoy division. For a detailed analysis, please see our Initiation report of January 2017.
To summarise, however, the major earn-out period is now over and JPJ will begin to take control over the strategic planning and budget from April 2017. We expect the dedicated Jackpotjoy staff at Gamesys to move over to JPJ from April 2019.
Following the amendment to the contract, the non-compete clause has been extended for another two years (April 2019). Although the expiration of this non-compete clause is a potential threat, we believe this is mitigated by growing barriers to entry and cross-shareholding between the two businesses.
Debt: Deleveraging from June 2017
As a consequence of the high acquisition cost of Jackpotjoy from Gamesys, JPJ’s net debt is relatively high, with 4x adjusted net debt/EBITDA in 2016. Although the major earn-out period is now over, a £87m payout is due in June 2017, with a further £41m remaining from Botemania,
Given the high cash flow generation within the business, JPJ expects to fund the remaining payments through its internally generated cash and from June 2017 we expect JPJ to begin the process of deleveraging.
Our forecasts indicate net debt remaining stable in 2017, with high cash flow offset by earnout payments. We forecast net debt of £279.6m in 2018, with an adjusted net leverage of 2.6x, approaching the company’s target of 2x in 2019.
Under the terms of its covenants, the group is permitted to pay dividends once net leverage reaches 2.75x and the company has stated that it intends to begin paying dividends once the balance sheet is restored to more sector average debt levels. According to our forecasts, we believe this might be achieved in 2019.
Following the listing in London, JPJ now reports in sterling and we have modified our model accordingly. The income statement has been translated with an average C$/£ FX of 0.56 and 0.51, for 2016 and 2015, respectively. The balance sheet has been translated at a YE spot rate of CAD$/£ of 0.60 and 0.49 for 2016 and 2015 respectively.
2016 revenues were in line with our expectations and we have left our 2017 and 2018 revenue estimates broadly unchanged. Given the headwinds of POC tax in the UK, combined with increasing taxation in other territories, the EBITDA margin of 38% in 2016 falls to 35% in 2017e and 34% in 2018e. This implies an absolute EBITDA growth of 3.7% in 2017 and 8.5% in 2018.
Exhibit 1: Change in estimates
£m |
Revenue (£m) |
PBT (£m) |
EBITDA (£m) |
|
Old |
New |
% chg |
Old |
New |
% chg |
Old |
New |
% chg |
2016 |
265.0 |
269.0 |
1.5% |
80.6 |
65.7 |
-18.5% |
98.6 |
102.2 |
3.7% |
2017e |
301.7 |
303.1 |
0.5% |
71.0 |
72.3 |
1.9% |
104.5 |
106.0 |
1.4% |
2018e |
334.7 |
338.7 |
1.2% |
80.2 |
84.3 |
5.1% |
110.8 |
114.9 |
3.7% |
Source: Edison Investment Research
